India's GDP growth will be over 6% in next fiscal: Ex-RBI Dy Guv R Gandhi

India's GDP growth will be more than six per cent in the next fiscal. "Factor that is helping India to achieve this level of GDP growth is that India is not dependent on export. Yes, there is emphasis on the export growth, but that is not the only growth engine for India. India growth story is going to be strong. It has got growth from internal factors like internal consumption demand which is picking up," says R Gandhi, Former Deputy Governor, RBI, in an exclusive interview with Bizz Buzz

Banks' net interest margins (NIMs) are also impacted by the slope of the yield curve. Your view…

There used to be no direct impact of the slope of the yield curve on NIM. In fact, NIM is typically related to a bank's interest rates which they charge for the advances and the one which they offer on the deposits. There is an indirect impact in that the yield curve movement, which is based on the monetary policy action. However, now increasingly banks are linking their assets to market based benchmark interest rates. Correspondingly, based on the monetary policy actions, the bank would be changing their interest rate on its advances. The yield curve movement is again due to the consequences of the monetary policy action. Thus, recent policy actions by MPC gets transmitted through yield curve and then onto the interest rates that the banks charge and then to NIM. However, deposit rates takes a longer time, as they are not yet linked to market benchmark. Hence in an interest rate increasing cycle Indian banks are set enjoy a higher NIM.

Banks are busy raising money through issuance of bonds to meet increased credit demand. Because the credit in the banks grew by 17 per cent whereas, deposits grew by merely 9.5 per cent in December. How do you look at it?

See, when the banks expect that the credit growth will be robust, they will work on resources raising capability. They will also see if they are able to raise deposits as per requirement. But when they find that the deposit growth was not happening in the proportion of the credit demand, then they will have to alter their interest rate structure. For mobilising deposit, they will have to attract the retail investors by increasing interest rate. It will be seen as a natural consequence.

What is your outlook on inflation?

There are two major factors that we should keep in our mind - one is inflation within the country and secondly, inflation in the rest of the world and how far it impacts the Indian economy. As regards Indian inflation, for a few quarters it has been staggering beyond the upper limit of the apex bank.

The monetary policy committee has been targeting the domestic inflation to be within the range of 2-6 per cent. But, the inflation has been at an elevated level of seven per cent which is beyond the upper boundary of the MPC directions for several quarters, thanks to Covid and the inflationary situation prevailing in the rest part of the world. Again, the forecast by the latest MPC meeting is showing that the inflation will come down and it will be below six per cent in the current quarter itself and will further go down later on. But inflation level, at an unprecedented level continues to pose a major challenge for the developed nations like the US, UK, Europe and even in Japan. In the process, their inflation could be exported through trade or capital movement channel. That is the one thing the RBI and MPC will have to constantly look at. The capital flows will all react to monetary policy action. The capital movement between the advanced nations and the emerging markets including India is very nimble, the way they react through policy changes. That can bring its own consequences on liquidity in the forex market in Indian economy. In addition, the ongoing geo-political situation is also a concern. Russia-Ukraine conflict has been continuing for one year. It will have its own impact on the Indian economy in the form of increased petrol prices. Then there are some silver linings too. We are getting oil at discounted price from Russia. Still, our permanent dependency on oil for growth means increasing the imported inflation. So, here we will have to be watchful. The forecast by the RBI and the MPC of bringing down the inflation below six per cent looks good. The India-based risk factors are much less.

What is your view on India's GDP growth?

We are in a very good advantageous position in the world today. It is at a time when the GDP growth rate of the advanced nation is faltering. I mean India has emerged as a shining star on the front. India is likely to register higher rate of growth among the major economies of the world in not only the current fiscal year, but also in the next fiscal year. My expectation is that GDP growth for the country will be more than 6 per cent in the next fiscal. Factor that is helping India to achieve this level of GDP growth is that India is not dependent on export. Yes, there is emphasis on the export growth, but that is not the only growth engine for India. India growth story is going to be strong. It has got growth from internal factors like internal consumption demand which was picking up.

Secondly, the private capital formation, or private investment, which had been languishing for past 6-7 years, has registered a very good uptick in the current fiscal. Again, higher demand for credit in the country at present also shows that the investment demand was better in the country. In addition, a recent RBI report also indicates that major part of incremental credit growth was happening in the form of fixed term loan. It will help increase investment operations of corporates and other borrowers. It indicates that investment vehicle has begun to be robust in the current fiscal.

Thirdly, government role, in terms of public investment, has also been constantly robust. Moreover, the government has clearly indicated that a sizable part of expenditure will go towards public investment. Thus, among the four engines of growth, the export engine may not be of that higher level, due to the muted growth in the rest of the world which is currently reeling under recession. That is why the Indian growth story is going to be robust for the current and next fiscal year.

Do you think if RBI will continue to be hawkish in raising rates?

That is unlikely in my opinion. The RBI and MPC's projection is that the inflation will now be tapering and coming below six per cent. In fact, I would expect that from withdrawing mode, MPC will move to neutral stance. When inflation is behaving well by constantly coming down to reach below six per cent, then RBI's hawkish stance will be mellowed.

What are your views on crypto regulation?

Crypto regulation poses another big challenge before the country. Now, increasingly it is recognised the role of crypto assets on the undesirable activities relating to money laundering, terror funding and extremely speculative activities.

There is a consensus built around the world through G20 and other forums that we need to be extremely careful about the positions relating to the crypto assets. The stance as taken by the RBI is that crypto currencies should be banned. That is a very strong view being maintained by the RBI on crypto currencies for several years now. There has been a discussion to mellow down the crypto currencies. However, RBI has not relented. In fact, the RBI governor, Dr Shaktikanta Das has recently warned that the next financial crisis may come due to crypto assets unless it was completely banned or fully controlled. Hence, the risk that the investors in the crypto assets face is very high. It is visible from the gyration in value of crypto asset from $68,000 to languishing below $15,000 now. It simply means that the impact that a crypto currency can create on its investors is quite unsustainable. Another problem is that if it was allowed to be used as a means of payment, then it can clearly undermine the monetary policy impact, because, the very purpose of cryptos is to have a parallel system. No country can allow a currency which was running parallel to its own currency. Hence, it is very unlikely that the crypto assets will have a free play.

How do you see CBDC? Will it replace crypto currency?

Issuance of CBDC is a reply to the argument that that people use private virtual currency as there was no such official currency based on modern technology. Thus CBDC is going to be a very strong response to the existence of private currencies. However, for CBDC to gain popularity, we will have to wait a lot. Again, CBDC will be fully free from any sort of speculation and legal in nature. So, I don't think if it will be able to completely negate the existence of private virtual currencies until they are banned.

What are your expectations from the Budget?

I expect that the Budget will continue to be growth supportive. Both private and public investment has to be very strong. That way, I would expect the government to continue to have strong emphasis on public investment. My next expectation is that the forthcoming Budget should have a clear indication towards fiscal consolidation. For past couple of years, there has been a relaxation on the fiscal deficit due to the Covid situation. Still, from the current fiscal onwards, there is an expectation that the government should go in for fiscal consolidation quickly. Thanks to robust increase in both direct and indirect tax collections, the government has got freedom to achieve fiscal consolidation much more quickly.

Do you think the full float of the Indian rupee will become a possible in the forthcoming Budget?

No. I don't think full float of rupee will become a possibility so shortly, because, for this to happen, we need to achieve strength on external front. Thanks to the existing level of fiscal deficit and current account deficit, it seems to be a difficult proposition at the moment. As on September, the CAD had crossed four per cent which is very high figure. I don't think if we will be able to achieve three per cent of CAD by year end; still it will again be a high level. For rupee to float fully, we need to have current account surplus that too on a sustainable basis. It doesn't seem to be a possibility in the near future. Until, the country becomes fully self-sufficient on its energy needs through alternate sources, which was 3-5 years away, we can't see rupee floating fully.